Pressures are growing on mutual thrifts, forcing many to choose between selling out to a bigger competitor or relinquishing their mutual charter.

First Federal Bank of Wisconsin in Waukesha and Bay View Federal Savings and Loan in Milwaukee are trying a tricky third way to survival by merging similar sized institutions.

The surviving mutual, which will have First Federal's charter and brand, will have roughly $250 million in assets. The two thrifts are tiny, but they demonstrate the importance of social compatibility in mutual mergers, where money rarely changes hands.

"They are really the poster children for a merger of equals," says Peter Wilder, a Godfrey & Kahn lawyer who worked on the deal. "The reason this merger works so well is that they have complementary strengths and weaknesses, products and geographies."

The pressures that have fueled bank consolidation are more pronounced for mutuals, which have limited ways to raise capital. Many have converted to stock ownership and then sold out to bigger banks. The ranks of mutual thrifts have fallen from around 4,000 in 1980 to 577 now, according to advocacy group America's Mutual Banks.

The pace of mutual mergers is expected to accelerate. Nearly half of mutuals surveyed recently by the American Bankers Association said a merger was likely or certain in the next three to five years. Larger mutuals determined to hold on to their charters while looking to cut costs could follow the same path as First Federal and Bay View.

"We did look at conversion … but we decided that we preferred to remain a mutual," says First Federal Chief Executive Gary Riley. "As a mutual, we have time to control the strategic pace. The board gets to decide the pace of growth, not shareholders."

The deal will combine First Federal's strong infrastructure with Bay View's strong earnings.

Bay View earned $1.2 million in 2013 and $1.3 million a yer earlier. But with one branch and ten employees, it needed a stronger compliance foundation and better technology to handle rising regulation. Bay View also lacks checking accounts and online banking.

"We needed a CFO, an IT person and a compliance person," says Steve Johnson, Bay View's president. "One of the directors put it very well: We can get these people but then we're turning the organization over to strangers."

So Johnson turned to Riley. They had met at a conference in the mid-2000s and had been kicking around the idea of a merger for several years, they say.

First Federal has three branches and 21 employees. Its earnings have struggled because of low interest rates. It earned $287,000 in 2013 and $328,000 a year earlier.

First Federal had already made the necessary compliance and technological investments. It had boosted its regulatory capacity and rolled out a full line of online-banking products.

"We had made the investments, but we weren't generating enough revenue in today's low-rate environment to make it work," Riley says. He decided that "competitive viability is more important than individual control."

Splitting regulatory and technology costs is a key benefit of merging small mutuals, says Doug Faucette, head of Locke Lord's financial institutions practice.

"This merger will make life more bearable for each of them," Faucette says. "There are a number of  compliance functions that you simply cannot do without a certain amount of scale."

The mutuals have complementary business lines and balance sheets. Bay View is "like an old-fashioned savings and loan," Riley says, with a large business in CDs and a sizable securities portfolio. First Federal has a smaller investments portfolio; half of its loans involve commercial real estate.

Despite the good fit, the deal was tricky and time consuming to put together. The CEOs first approached their boards about a merger in November 2012. They then had to work out the details of sharing power.

The board is evenly split. Riley will be chairman and CEO. Johnson will become president. Bay View's low headcount reduced power-sharing issues. The mutuals do not expect any layoffs.

For those who feel that thrifts have been placed at a disadvantage by recent changes, the deal is a heartening example of commitment to the mutual charter.

"Mutuals like this should be commended for at least trying to remain mutual and serve their communities," Faucette says. "Their other choice is to convert and merge, and disappear."

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